If you have children, own property, have investments, or have spent years building financial security for your family, you may have wondered what would happen to everything you leave behind if you died.
You might also have come across the term “testamentary trust” or “testamentary discretionary trust” (often shortened to TDT) when researching Wills and estate planning.
The name sounds complicated, but the idea is relatively simple.
A testamentary discretionary trust is a way of leaving an inheritance for your family without handing it directly to them.
Instead, you arrange for the inheritance to be looked after by someone you choose (who is called the “trustee” of the trust), who can use the money and assets to support your family over time (who are the “beneficiaries” of the trust).
For example, rather than leaving $1 million directly to your children, you could arrange for that money to be held in a trust. The person managing the trust could then use the money to pay for your children's education, healthcare, living expenses, holidays or other things that benefit them.
You get to decide who can benefit from the trust, who will manage it, and the rules they must follow.
This can give your family greater flexibility in how an inheritance is managed, while also providing opportunities for tax planning and protecting family wealth.
Let's look at how testamentary discretionary trusts work and why they might be worth considering as part of your estate plan.
What is a testamentary discretionary trust?
A testamentary discretionary trust is a trust that is created through your Will and only comes into existence after you die.
It allows you to leave money, property, and other assets to be managed for the benefit of people you choose, rather than giving those assets directly to them.
The person managing the trust is called the trustee.
The people who can benefit from the trust are called the beneficiaries.
The trustee is responsible for looking after the assets and deciding how the money is used or distributed, following the instructions and rules you have included in your Will.
The word “discretionary” simply means the trustee has some flexibility when deciding which beneficiaries receive money, how much they receive, and when they receive it.
For example, if you have two children, the trustee might use trust money to pay university fees for one child while helping the other with medical expenses or a deposit on their first home.
The trustee can consider what each child needs at the time, rather than being required to divide everything equally.
This flexibility is one of the reasons testamentary discretionary trusts can be so valuable for families.
How does a testamentary discretionary trust work?
Let's use a real-life example.
Imagine you and your partner have:
A family home worth $1.2 million.
$800,000 in superannuation between you.
$200,000 in savings and investments.
Two children aged 6 and 9.
You have spent years working, saving, and building a life for your family. Naturally, you want your children to be financially secure if something happens to both of you.
You also know that receiving a substantial inheritance at 18 might not be the best thing for them.
With a testamentary discretionary trust included in your Wills, you can arrange for their inheritances to be held in trust and managed by someone you choose.
Rather than your children receiving a large lump sum of money outright, the trustee could use the inheritance to pay for things such as:
School fees, university, and other education expenses.
Medical treatment and healthcare.
Everyday living expenses.
Holidays and other experiences.
A first car.
Help with purchasing their first home.
Other expenses that support their needs and wellbeing.
As your children grow older, the trustee can continue making decisions about how the inheritance is used.
Your children can benefit from the money throughout their lives without necessarily having to take ownership of the entire inheritance themselves.
The trust can also provide for future generations, depending on how it is structured.
Essentially, you are creating a way for the wealth you leave behind to continue supporting your family long after you are gone.
Who is involved in a testamentary discretionary trust?
There are a few important people involved in a testamentary discretionary trust. You don't need to remember all the legal terminology, but it helps to understand what each person does.
1. You, the Will-maker
You are the person who decides to include the trust in your Will.
You decide who you want the trust to benefit, who should manage it, and the rules that should apply.
This is your opportunity to think about what you want to happen to your inheritance and how you want your family to be supported after your death.
2. The trustee, the person looking after the inheritance
The trustee is the person responsible for managing the money and assets held in the trust.
You can think of them as the person looking after the inheritance on behalf of your family.
Their responsibilities can include:
Looking after and investing the trust's money.
Paying expenses for the beneficiaries.
Deciding which beneficiaries receive money.
Deciding how much money is paid and when.
Keeping financial records and managing the trust's administration.
The trustee must follow the rules in your Will and act in accordance with their legal responsibilities.
Choosing the right trustee is incredibly important. You want someone who is financially responsible, understands the needs of your family, and can be trusted to make sensible decisions.
3. The beneficiaries, the people who benefit from the inheritance
The beneficiaries are the people who may receive financial support from the trust.
Depending on how your Will is drafted, these might include:
Your children.
Your grandchildren.
Your husband, wife, or partner.
Other family members.
You can establish a group of people who are eligible to benefit from the trust.
The trustee can then decide how the trust's money is used for those people, taking their individual circumstances into consideration.
For example, if one child has additional medical needs or requires more financial support than their sibling, the trustee can take that into account when making decisions.
4. The appointor, the person who can change the trustee
Some testamentary discretionary trusts also include an appointor.
The appointor generally has the power to appoint or remove the trustee, depending on the rules in your Will.
This is an important role because it provides a way to change who manages the inheritance if the original trustee can no longer do the job or is no longer the right person.
Your Will should also explain what happens to this role if the appointor dies or loses capacity.
What is the difference between a standard Will and a Will with a testamentary discretionary trust?
A standard Will generally provides for your assets to be distributed directly to the people you nominate.
For example, you might leave everything equally to your two children.
Once your estate has been administered and the inheritance has been transferred to them, they own that money and can generally do what they want with it.
A Will containing a testamentary discretionary trust gives you another option.
Instead of giving the inheritance directly to your children, you can arrange for it to be held and managed in a trust for their benefit.
Here's a simple comparison:
| Standard Will | Will with a TDT |
|---|---|
| Your inheritance is generally given directly to your beneficiaries. | Your inheritance can be held in a trust for your beneficiaries. |
| Your beneficiaries own their inheritance personally. | The trustee manages the inheritance for the benefit of the beneficiaries. |
| The trustee manages the inheritance for the benefit of the beneficiaries. | The trustee decides how and when money is made available, within the trust rules. |
| Less ongoing administration. | More ongoing administration and responsibilities. |
| Once distributed, you have no control over how the inheritance is managed. | You can establish rules for how the inheritance is managed after your death. |
Neither option is automatically better. It comes down to your family, your assets, and what you want to achieve.
What are the benefits of a testamentary discretionary trust?
There are several reasons why families consider including testamentary discretionary trusts in their Wills.
1. You have greater control over your children's inheritance
If you have young children, one of your biggest concerns might be what happens to their inheritance if you and your partner both die.
You might be comfortable with your children eventually receiving their inheritance outright, but you may not want them receiving hundreds of thousands of dollars the moment they turn 18.
A testamentary discretionary trust gives you the ability to arrange for their inheritance to be managed for them.
The trustee can use the money to support your children as they grow up, helping with education, living expenses, and other important milestones.
You can also establish rules about when and how the inheritance can be distributed.
This means you can provide for your children financially without necessarily handing them control of a substantial inheritance while they are still young.
2. You can help protect your family's inheritance
Leaving someone a substantial inheritance outright means that money becomes part of their personal financial circumstances.
Depending on what happens in their life, that inheritance could become exposed to financial risks.
For example, your child might:
Go through a relationship breakdown or divorce.
Become bankrupt.
Accumulate significant debts.
Be involved in a legal claim.
Make poor financial decisions or spend their inheritance irresponsibly.
A properly structured testamentary discretionary trust can provide a degree of protection because the inheritance is held and managed by the trustee rather than owned personally by the beneficiary.
This can make it more difficult for certain creditors or other claimants to access the trust assets.
It is important to understand that this protection is not guaranteed in every situation. The outcome depends on the trust arrangements, the beneficiary's involvement and control, and the nature of the claim.
For example, trust assets can still be relevant in family law proceedings and there are circumstances where bankruptcy or other legal claims may affect trust assets.
The way the trust is established and managed matters.
3. You can access valuable tax planning opportunities
This is one of the biggest reasons testamentary discretionary trusts are worth exploring, particularly if you have children.
Australian tax law provides special tax treatment for certain income earned by testamentary trusts and distributed to eligible children under 18.
To understand why this matters, let's look at how children are usually taxed.
Ordinarily, children under 18 pay special tax rates on most income they receive from investments and trusts. These rates are designed to discourage parents from putting investments in their children's names simply to take advantage of lower tax rates.
However, there is an important exception for certain income earned from assets that originated from a deceased estate.
This is known as “excepted trust income”.
Where the relevant requirements are met, income distributed to eligible children through a testamentary trust can be taxed at the ordinary individual tax rates, rather than the special higher rates that generally apply to children's investment income.
What does this mean for your family?
It means that if your children inherit assets through a properly structured testamentary discretionary trust, there may be opportunities to distribute investment income to them in a much more tax-effective way.
For example, the trust might hold investment properties, shares or other income-producing assets.
The trustee may be able to distribute eligible income to your children, allowing them to benefit from the ordinary individual tax rates.
Depending on the amount of income involved and your family's circumstances, the tax savings can be significant, potentially tens of thousands of dollars every year.
And these opportunities are not necessarily limited to when your children are young. The trust can continue providing tax planning opportunities for eligible beneficiaries throughout its life, such as grandchildren.
Importantly, not all income earned by a testamentary trust automatically qualifies for this special treatment. The source of the assets and income matters, and specific requirements must be satisfied.
This is also a key difference between a testamentary discretionary trust and an ordinary family trust established during your lifetime.
An ordinary family trust does not automatically receive the same special tax treatment simply because children are included as beneficiaries.
Tax planning should always be considered with an accountant or tax adviser who understands testamentary trusts.
4. You can provide for different family members in different ways
Every family is different, and the financial needs of your children may be very different too.
One child might need additional financial support because of a medical condition, while another might be financially independent.
One might want to go to university, while another might want to start a business.
A testamentary discretionary trust gives the trustee flexibility to consider those differences when deciding how the inheritance is used.
You don't have to structure the trust so that every beneficiary receives exactly the same amount at exactly the same time.
Instead, you can establish a structure that allows your family to be supported according to their individual needs.
5. You can help keep family wealth within the family
You have worked hard to build your wealth. You may want the assets you leave behind to continue benefiting your children, grandchildren, and future generations.
A testamentary discretionary trust can help you achieve this by allowing an inheritance to remain within a trust rather than being transferred outright into a beneficiary's personal ownership.
For example, if your children receive an inheritance through a testamentary discretionary trust, the trust may continue holding those assets for their benefit and potentially the benefit of their own children.
This can help create a longer-term structure for managing family wealth.
The trust terms will determine who can benefit, how the assets are managed, and what happens when the trust eventually comes to an end.
Do testamentary discretionary trusts only benefit children?
No. While testamentary discretionary trusts are particularly valuable for parents with young children, they can benefit people of all ages.
You might have adult children who are already working, married, or raising their own families.
You might also have concerns about their financial circumstances or ability to manage a substantial inheritance.
For example:
Your child works in a profession where they could be exposed to litigation.
Your child has experienced financial difficulties or bankruptcy.
Your child is in a second marriage or blended family.
You want to provide for your spouse while preserving wealth for your children.
You want your grandchildren to benefit from your inheritance in the future.
A testamentary discretionary trust can be structured to provide for a wider group of family members, depending on your wishes.
Do my children have to wait until they are 18, 21, or 25 to receive money from the trust?
No. There is no universal age at which children can access money held in a testamentary discretionary trust.
The rules in your Will determine how the trustee can use the trust's money.
For example, if your children are still at school, the trustee might use trust funds to pay their school fees, medical expenses, sporting activities, or other living costs.
They can benefit from the inheritance while they are still young.
Equally, turning 18 does not automatically mean they receive the entire inheritance in their own names.
The trust can continue operating into adulthood, allowing the trustee to manage the inheritance and make decisions about distributions.
This is one of the important distinctions between leaving an inheritance directly to your children and holding it in a testamentary discretionary trust.
Does every family need a testamentary discretionary trust?
No. A testamentary discretionary trust is not necessary or appropriate for every family.
There are additional costs involved in establishing and administering a trust, along with ongoing responsibilities for the trustee.
You need to consider whether the benefits justify that additional complexity.
A testamentary discretionary trust may be worth exploring if:
You have young children and want their inheritance managed as they grow up.
You have accumulated significant wealth, property, or investments.
You want to create tax planning opportunities for your children.
You are concerned about a beneficiary's ability to manage a substantial inheritance.
You have a family business or other assets that need careful succession planning.
You are in a blended family or second marriage.
You want to provide for your spouse while also preserving wealth for your children.
You want your inheritance to benefit future generations.
The right structure will depend on your family circumstances, the assets you own, and what you want to achieve.
Can I add a testamentary discretionary trust to my existing Will?
If you already have a Will and are considering a testamentary discretionary trust, you will generally need a new Will to establish the trust.
A testamentary discretionary trust isn't something that can simply be added to your existing Will by inserting a few extra clauses. The trust needs to be properly drafted into the Will, with the appropriate provisions and arrangements to ensure it operates as intended.
There are also important decisions to make about who will benefit from the trust, who will manage it, how your estate will be distributed, and what should happen in different circumstances.
Your broader financial arrangements need to be considered too. Not everything you own will necessarily form part of your estate or be dealt with under your Will. Superannuation, jointly owned assets, life insurance, and interests in companies or other trusts can all have different rules governing what happens when you die.
This is why establishing a testamentary discretionary trust should involve a comprehensive review of your existing Will, family circumstances, asset ownership and estate planning objectives.
If you are considering a TDT, the first step is to obtain advice about whether it is appropriate for your circumstances and how your estate plan should be structured to accommodate it.
Is a testamentary discretionary trust the same as a family trust?
No. Although both are types of discretionary trusts, they are established in different ways.
A family trust is generally established during your lifetime through a trust deed.
A testamentary discretionary trust is established through your Will and only comes into existence after your death.
There is also an important difference when it comes to tax.
A testamentary discretionary trust can access special tax treatment for certain income distributed to eligible minor beneficiaries, provided the requirements for excepted trust income are met.
An ordinary family trust does not receive that same treatment simply because children are included as beneficiaries.
This is one of the reasons testamentary discretionary trusts are often considered when families are looking at how to pass wealth to their children.
How long does a testamentary discretionary trust last?
A testamentary discretionary trust can continue operating for many years, depending on how it is structured.
In Queensland, the general maximum period for a trust is 125 years, subject to applicable exceptions and the terms of the trust.
This means a trust established under your Will could potentially continue well into your children's adult lives and provide benefits for future generations.
The trust may also end earlier if the conditions set out in your Will are met.
When establishing a trust, it is important to think about what should happen to the assets when the trust eventually ends and who should receive them.
Do I need a lawyer to establish a testamentary discretionary trust?
A testamentary discretionary trust needs to be properly written into your Will.
There is a lot to consider when establishing one, including:
Who should benefit from the trust.
Who should manage the inheritance.
Who should have the power to appoint or remove the trustee.
What the trustee can spend money on.
How and when beneficiaries can receive money.
What happens if a trustee dies or can no longer act.
What happens when the trust eventually ends.
These decisions need to be considered alongside your broader estate plan, including your superannuation, property ownership, life insurance, and other assets.
It is important to get the structure right from the beginning so that the trust operates in the way you intended.
You should also obtain appropriate taxation and financial advice about the ongoing operation of the trust.
Is a testamentary discretionary trust right for your family?
When you think about your Will, it is easy to focus on who will receive your assets when you die.
But there is another important question worth asking.
How do you want those assets to be managed, and how do you want them to benefit your family in the years that follow?
A testamentary discretionary trust gives you another way to approach your inheritance.
It can provide greater flexibility in managing family wealth, opportunities for tax planning, and a degree of protection for the people you leave behind.
For families with children, significant assets, blended family arrangements or concerns about how an inheritance might be managed, it is certainly worth exploring.
At Sun Wills & Estates, we help Queensland families look beyond simply having a Will in place. We consider the bigger picture, including how your family will be provided for, how your assets will be managed, and what arrangements will best support your wishes for the future.
Your estate plan should consider more than who gets what. It should consider what happens next.
General information only. This article provides general information about testamentary discretionary trusts and is not legal, financial or taxation advice. The suitability and operation of a trust will depend on individual circumstances, the terms of the Will and applicable laws.
Learn how a testamentary discretionary trust can protect your family's inheritance.
Thinking about including a testamentary discretionary trust in your Will?
Our free guide explains how testamentary discretionary trusts work, their potential benefits and limitations, and when they may be worth considering as part of your estate plan.
Inside you'll learn:
✓ What a testamentary discretionary trust is
✓ How it works after someone dies
✓ Asset protection benefits
✓ Tax considerations
✓ Protecting children's inheritances
✓ Protecting vulnerable beneficiaries
✓ Case study examples
The information in this ebook is general information only and not legal advice.